Thursday, September 11, 2014

Fed Weighs Change to Rate Guidance for Added Flexibility

Federal Reserve officials are considering whether to alter their guidance on the likely path of interest rates to give them more flexibility to react to changes in the economy.

The Fed has said since March that its benchmark rate would stay low for a “considerable time” after it completes monthly bond buying intended to boost growth. With purchases set to end late this year and the Fed nearing its full-employment goal, that assurance will soon become obsolete.

The need for new guidance unites policy makers who want to keep rates low for longer, like Boston Fed President Eric Rosengren, with those who prefer to raise them sooner, such as Philadelphia’s Charles Plosser. Both want to move away from promising to keep rates low for some unspecified period of time toward tying the first increase to changes in inflation and the job market. One stumbling block: how to change the language without sparking an unwanted jump in bond yields that could threaten to stifle the expansion.

“That’s going to be hotly debated,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former Fed Board researcher. “If they can find a way to replace that with something that will mollify the market’s reaction, you will see a change.”

About 1,500 people seeking employment wait in line to enter a job fair at the Arena Stage at the Mead Center for American Theater on March 28, 2014 in Washington, DC.

Tightening isn’t imminent. In June, policy makers forecast that the benchmark federal funds rate would rise some time next year. They will issue new forecasts for the rate, along with economic growth, unemployment and inflation, at the conclusion of a Sept. 16-17 meeting of the Federal Open Market Committee.

Twin Goals

Policy makers say they want to move away from any form of guidance based on time periods and dates, and instead stress that the outlook for the federal funds rate depends on progress toward the Fed’s twin goals of full employment and low and stable inflation.

“As we approach levels of unemployment that many consider ‘full employment,’ the Fed should no longer issue guidance on the approximate timing of any monetary policy changes,” Rosengren, who has backed unprecedented stimulus and doesn’t have a vote on policy this year, said in a Sept. 5 speech in Boston.